Lower rates alone will not stop GST evasion — simpler rules will

The Goods and Services Tax (GST), when it was first launched, was supposed to simplify the indirect tax system in the country, and at the same time lead to higher tax collections for the government.

However, 20 months after it was introduced in July 2017, it has failed on both counts. Let’s take a detailed look on this issue, point-wise.

1) The central GST collections (see accompanying chart), or the portion of the total GST which goes into the central government’s kitty, stood at ₹37,095 crore, for February 2019. While, this was a slight improvement on the ₹35,066 crore collected in January 2019, it was nowhere near what was needed to fulfil the target set in the budget.

2) When the budget for 2018-19 was originally presented in February last year, the government hoped to earn ₹6,03,900 crore from central GST. In the interim budget presented last month, the number was revised to ₹5,03,900 crore, which meant a shortfall of ₹1,00,000 crore. From the looks of it, it is highly unlikely that even the revised central GST target will be met.

3) Between April 2018 and February 2019, the total central GST collected stands at ₹4,12,531 crore. This is ₹91,369 crore short of the revised target of ₹5,03,900 crore, with just a month to go in this financial year. The highest central GST collection ever have been ₹57,893 crore in July 2018.

Given this, it is highly unlikely that even the revised central GST target of ₹5,03,900 crore will be met. The government is likely to see a shortfall in excess of ₹50,000 crore from the revised target, if things go as per trend. If we compare this to the original target of ₹6,03,900 crore, the shortfall is likely to be ₹1,50,000 crore, if not more. And that’s quite a lot of money.

4) One reason offered for lower GST collections in the recent past has been that the GST council has cut the tax rates.

This is something that goes against logic, given that these rate cuts are supposed to be revenue neutral. This basically means that a cut in rates should lead to a jump in GST collections, and hence, the government will end up earning the same amount of GST as it did in the past. The point about lower rates leading to lower GST collections doesn’t make much sense.

5) Now let’s apply Occam’s Razor in this case, which basically means the simplest answer is usually the correct one. A huge proportion of people, who the government thinks should be paying GST, currently aren’t. In November 2018, which is the latest data available, 28.75% of the those who should have been filing their GST returns, weren’t. The figure stood at 15.44% in April 2018.

The question is why are so many people not filing their GST returns? The simple answer lies in the fact that they haven’t paid their share of GST.

How can the government correct for this? The GST Council has tried to correct for this by lowering the rates. But that hasn’t worked. The only way to turn this around is to simplify the GST system operationally and philosophically, which clearly hasn’t happened.

What has happened in the name of simplification is basically lowering of GST rates and taking away of input tax credit benefits.

Without input tax credit, GST no longer remains a value added tax as it was originally envisaged to be. It becomes yet another tax, in a series of taxes, beating the entire purpose of launching the GST.

6) On the issue of GST being complicated, several experts have pointed out that the earlier system of many indirect taxes across states was even more complicated. That is true, but only partly. It is not true for the services part of GST which used to come under service tax.

The service tax was a centralised tax and was much simpler than GST. Why can’t the government look at going back to similar structure, is a question well worth asking.

In 2018-19, services are expected to form nearly 49.7% of the Indian economy. Given this, a tax which is applicable on nearly half the economy, cannot be complicated. Also, it is worth remembering that many of those operating in the services sector do not have the kind of scale, like those operating in the goods part of the economy do.

7) What has happened in the present GST operational structure is what I would like to call the classic frontend-backend government problem. The GST being collected needs to be split in different ways between the central government and the state governments. This is a process that should have been working in the backend and the GST filer need not have had to go through it while filing his returns. (How is it my concern as a taxpayer, whether the GST being charged as central GST, state GST or integrated GST, for that matter, as long as there is one number that I need to pay).

But, like is the case with most government filings (the income tax returns are a terrific example), this backend has been moved on to the front end, for the individual filing the GST return to deal with.

This is a problem at the heart of the current GST mess and tax collections are not going to improve, unless the government deals with it. And that will mean coming up with a totally new operational structure for the GST, given that the current one is in a big mess.